What is driving the integration of the world economy, and who benefits and who loses?
Explain the causes of globalisation and evaluate its economic effects on growth, inequality and development
A focused answer to the H2 Economics learning outcome on globalisation. The drivers of growing world integration, the benefits for growth and consumers, the costs including inequality and vulnerability, and a balanced evaluation.
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What this dot point is asking
SEAB wants you to explain the causes of globalisation and evaluate its economic effects on growth, inequality and development. The central insight is that globalisation has raised world output substantially and lifted many out of poverty, but its gains are unevenly shared and it increases exposure to external shocks, so the verdict is balanced.
The answer
What globalisation is
Globalisation is the growing integration and interdependence of national economies through trade, investment, finance, technology and the movement of people. It has made supply chains, financial markets and labour markets increasingly global.
The causes of globalisation
- Falling transport and communication costs. Containerisation, cheap air freight and the internet have made moving goods, services and information across borders far cheaper.
- Trade liberalisation. Decades of tariff reduction and the spread of trade agreements have opened markets.
- Multinational corporations and global supply chains. Firms locate different stages of production wherever they are cheapest, integrating economies.
- Financial liberalisation. The freeing of capital flows lets investment move across borders.
- Technological change. Advances in IT and logistics underpin global coordination.
The benefits of globalisation
- Faster growth through greater trade and investment, realising the gains from comparative advantage on a world scale.
- Lower prices and more choice for consumers, who buy from the cheapest global source.
- Economies of scale for firms serving a global market.
- Foreign direct investment bringing capital, jobs and technology to host economies.
- Faster development. Economies that integrate into world trade have grown rapidly and reduced poverty.
The costs of globalisation
- Widening inequality within and between countries.
- Greater vulnerability to external shocks: trade and financial linkages transmit downturns and crises rapidly.
- Environmental costs from rising production, transport and resource use.
- Loss of policy autonomy, as global capital and trade rules constrain national choices.
Evaluation
Globalisation has been broadly beneficial: it has raised world output and lifted hundreds of millions out of poverty, with especially large gains for small open economies. But the gains are uneven and it increases exposure to shocks, so its overall value depends on how well countries manage adjustment (retraining, redistribution) and build resilience to external shocks.
Examples in context
Example 1. Singapore as a globalisation success. Singapore built its prosperity on deep integration into the world economy: as a trade and finance hub, a magnet for multinational investment, and a node in global supply chains. It is a leading example of an economy that has captured the growth, investment and technology benefits of globalisation, while using retraining and reserves to manage adjustment and shocks.
Example 2. Inequality and the globalisation backlash. In several advanced economies, the loss of manufacturing jobs to lower-cost producers abroad, alongside large gains for skilled workers and capital, has widened inequality and fuelled a political backlash against globalisation. This illustrates the within-country distribution problem and why managing the losers' adjustment is central to sustaining open trade.
Try this
Q1. State two causes of globalisation. [2 marks]
- Cue. Falling transport and communication costs and trade liberalisation (also multinational supply chains, financial liberalisation and technological change).
Q2. Explain one benefit and one cost of globalisation. [3 marks]
- Cue. Benefit: faster growth and lower prices from trade and investment on a world scale. Cost: widening inequality within countries as gains concentrate among skilled workers and capital owners while some low-skilled workers lose out.
Q3. Explain why globalisation increases vulnerability to external shocks. [2 marks]
- Cue. Deep trade and financial linkages mean a downturn or financial crisis abroad spreads quickly to an integrated economy through falling exports and capital flows.
Exam-style practice questions
Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Original10 marksExplain the main causes of globalisation, and discuss its benefits for an economy.Show worked answer →
A 10 mark question rewards the drivers of globalisation and a discussion of its benefits.
- Causes
- Falling transport and communication costs (containerisation, the internet); trade liberalisation and the growth of trade agreements; the spread of multinational corporations and global supply chains; financial liberalisation allowing capital to flow freely; and technological change.
- Benefits
- Faster growth through greater trade and investment; lower prices and more choice for consumers; access to larger markets and economies of scale for firms; inflows of foreign direct investment bringing capital, jobs and technology; and faster development for emerging economies that integrate into world trade.
- Judgement
- Globalisation has raised world output and lifted many out of poverty, with large benefits for open economies, though the gains are uneven.
Markers reward at least three causes, at least three benefits, and recognition that the gains, though large, are unevenly shared.
Original9 marksDiscuss whether globalisation has been beneficial, considering its effects on inequality and economic vulnerability.Show worked answer →
A 9 mark discuss question rewards both benefits and costs and a balanced judgement.
- Benefits
- Higher growth and incomes, poverty reduction in fast-integrating economies, lower consumer prices, technology transfer and access to global markets and capital.
- Costs
- Widening inequality, both between and within countries, as gains concentrate among skilled workers and capital owners while some low-skilled workers lose out; greater vulnerability to external shocks (a downturn or financial crisis abroad spreads quickly); environmental costs; and a possible loss of domestic policy autonomy.
- Judgement
- Globalisation has raised global output and reduced absolute poverty substantially, so it is broadly beneficial, but the gains are unevenly distributed and it raises exposure to external shocks, so the case depends on how well countries manage adjustment, redistribution and resilience.
Markers reward benefits and costs, the within- and between-country inequality point, the vulnerability-to-shocks point, and a judgement conditioned on managing distribution and resilience.
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